Learning The Abys Of Ids Fund Shares

WERNER RENBERG - Mutual Funds

"I told him that Twentieth Century funds are no-loads, and that with IDS funds we pay some kind of commission. He told me that an IDS guy told him we weren't.

"Which one of us is right?'' Always glad to solve such easily solvable marital differences, I'll try to explain - and at the same time perhaps to clear up some of the confusion resulting from the continuing proliferation of the ways in which mutual funds are offered to you.

Twentieth Century is a Kansas City, Mo.-based family of 65 no-load equity, bond and money-market funds with total net assets of $50 billion (including the Benham funds, which became part of the family last year) that are available without sales charges of any kind to those who deal directly with the company.

Shares of most of the group's funds also are available on a no-load basis through Charles Schwab, the leading discount broker.

IDS funds, offered by Minneapolis-based American Express Financial Advisors, constitute a family of 32 equity, bond and money-market funds with total net assets of $50 billion that are available only through 8,000 American Express group financial planners nationwide.

Like other fund complexes that use brokers and other members of sales forces, American Express offers its funds' shares in more than one class to provide for different arrangements for selling shares and for paying those who do. IDS funds' shares are issued in three classes:

-- "A" shares with a maximum front-end sales load of 5 percent.

-- "B" shares with a deferred sales charge, which starts at 5 percent of the original purchase price and declines in several years.

In addition, American Express offers its funds within so-called "wrap" programs, in which the shares also are sold at NAV but for which investors pay a fee.

The reader did not specify which class of shares her husband had discussed with the American Express planner or whether they may have discussed a wrap program.

If they were discussing Class B shares, the misunderstanding would have been a common one, based on comments from other readers. Because B shares involve no front-end load, and, therefore, don't face the investor resistance that front-end load funds may evoke, sales people like to sell them.

Although the planner would not receive an actual commission for selling IDS funds' B shares, he would receive some compensation directly linked to their sales.

Shareholders of IDS funds' B shares absorb annual 12b-1 fees of .925 percent of average net assets (or 92.5 basis points) - in addition to portfolio management fees and other expenses - out of which American Express financial planners are paid. (As the Securities and Exchange Commission requires funds to point out, over time such annual charges can exceed the front-end load that investors may have wanted to avoid.) Authorized by the SEC in 1980 as a way of enabling fund companies to tap fund assets to finance costs associated with fund sales, 12b-1 fees are imposed by a number of companies whose funds involve neither a front-end nor a back-end load - funds that you think of as no-load funds.

Under a National Association of Securities Dealers rule dealing with "asset-based sales charges" (including 12b-1 fees), no NASD member can "either orally or in writing" describe such a fund as a no-load fund if its "total charges against net assets to provide for sales-related expenses and/or service fees" exceed .25 percent. (Approved by the SEC in July 1992 and effective a year later, the rule also applies to descriptions of shares with back-end loads, such as IDS' and competing funds' B shares.) At the recent Mutual Funds and Investment Management Conference in San Diego, there was a brief stir over the question of whether funds that generally have been regarded as no-load funds and that are sold in Schwab's "OneSource" no-transaction fee program may properly be called no-load.

The reason? To handle the funds, Schwab charges 25 to 35 basis points. Funds that Schwab bills more than 25 basis points, but that limit their 12b-1 fees to 25 so they may be called no-loads, have to get their money from another category of their operating expenses. Whether taken out of the management fee or other expenses, a load fund company executive contends, it's still an asset-based charge.

To Schwab, it doesn't matter out of which fund expense category it is paid, a spokesman said, but it does matter that its annual fee of 25 to 35 basis points does not represent an additional charge to investors.

The shares of a no-load fund that Schwab sells in its OneSource program have to be identical to the shares that a no-load complex sells directly to investors, he explained. They must have the same total annual operating expenses.

Werner Renberg is a syndicated columnist and author of books about mutual funds. His column appears on Mondays.